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ET Engage. ET Secure IT. Cryptocurrency By. The Reserve Bank is sensitive to the credit risk it faces on account of the investment of foreign exchange reserves in the international markets.
Further, deposits are placed with central banks, the BIS and commercial banks overseas. The Reserve Bank continues to apply stringent criteria for selection of counterparties.
Developments regarding counterparties are constantly under watch. The basic objective of such an on-going exercise is to assess whether any counterparty's credit quality is under potential threat. Market risk for a multi-currency portfolio represents the potential change in valuations that result from movements in financial market prices, for example, changes in interest rates, foreign exchange rates, equity prices and commodity prices. The major sources of market risk for central banks are currency risk, interest rate risk and movement in gold prices.
The balance in IRA is meant to provide cushion against changes in the security prices over the holding period. Currency risk arises due to movements in the exchange rates. Decisions are taken on the long-term exposure to different currencies, depending on the likely movements in exchange rates and other considerations in the medium and long-term. The decision-making procedure is supported by reviews of the strategy on a regular basis.
The crucial aspect of the management of interest rate risk is to protect the value of the investments as much as possible from adverse impact of interest rate movements. The interest rate sensitivity of the portfolio is identified in terms of the benchmark duration and the permitted deviation from the benchmark. Liquidity risk involves the risk of not being able to sell an instrument or close a position when required without facing significant costs.
The reserves need to have a high level of liquidity at all times in order to be able to meet any unforeseen and emergency needs. Any adverse development on the external front would pose a demand on our forex reserves and, hence, the investment strategy needs a highly liquid portfolio. The choice of instruments determines the liquidity of the portfolio.
For example, in some markets, treasury securities could be liquidated in large volumes without much distortion of the price in the market and, thus, can be considered as liquid. In tune with the global trend, close attention is paid to strengthen the operational risk control arrangements. Key operational procedures are documented.
Internally, there is total separation of the front office and the back-office functions and the internal control systems ensure several checks at the stages of deal capture, deal processing and settlement. The deal processing and settlement system, including generation of payment instructions, is also subject to internal control guidelines. There is a system of concurrent audit for monitoring compliance in respect of the internal control guidelines.
Further, reconciliation of accounts is done regularly.
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